Determinants of the recent soaring food inflation in Ethiopia: By Dr Jema Haji and Fekadu Gelaw

Recently, Ethiopia’s food price inflation has increased dramatically. Given the double digit growth rate and a lagging demand reported by the government, the current food price hike in the country remained a puzzle to many. Using monthly data from 1997 to 2010, this study identified the long-run and short-run external and domestic factors causing Ethiopia’s food inflation using Johansen’s cointegration test and Vector Error Correction Model (VECM), respectively. The study results did not support government’s claim that Ethiopia’s inflation is a non-monetary phenomenon. On the contrary, monetary developments remain important and significant factor in explaining the high food inflation in Ethiopia. Moreover, there are other important factors that explain Ethiopia’s soaring food inflation, including the general price level, world grain price index, lagged world DAP price index, domestic benzene price index, non-food price index, shocks in the goods and money markets, the continuous depreciation of Birr against dollar and the degree of inflation inertia. Therefore, stabilization policies to dampen inflation expectations and a prudent fiscal policy as a means of avoiding sources of macroeconomic imbalance are quite apparent to reduce the rapidly rising food prices in the country. read more Determinants of the recent soaring food inflation in Ethiopia: By Jema Haji and Fekadu Gelaw